The Week Ahead (4 - 8 May): US NFPs & UK AGM season

Again, good commentary in the free weekend PensionCraft Market Round-Up email. Can't find a link so I will reproduce it here....

The Bank of England was the most studious in hedging its bets, laying out three scenarios to illustrate how energy prices and second-round effects could hit the UK economy. One of the key inputs is the path for oil prices:

It declined to label the scenarios, so I’ve taken the liberty of naming them myself.

Scenario A: This Is Fine

The energy shock is short-lived and weakness in demand absorbs the hit, preventing any second-round effects. Inflation peaks at 3.5% in late 2026 and falls back below target within three years.

Scenario B: Stuck in the Middle with You

Energy prices peak at similar levels but stay elevated for longer. Second-round effects are modest. Inflation again peaks at 3.5% and falls back close to target, but rates need to stay higher than markets currently expect. This is Governor Bailey’s base case.

Scenario C: Hold On To Your Butts

Energy prices rise sharply and remain elevated for a prolonged period. Second-round effects are significant, with inflation peaking above 6% in early 2027 and remaining above target until 2029. Bank Rate would need to rise "materially" to bring it back down.

The mechanism by which energy prices feed through to inflation is well-established: direct effects (your gas bill goes up), indirect effects (everything that requires energy to produce or transport gets more expensive), and second-round effects (workers demand higher pay and firms raise prices to protect margins). The first two are mechanical and largely unavoidable. The third is where central banking becomes more art than science.

Whether second-round effects materialise depends on three things: the magnitude and duration of the energy shock, how much slack there is in the economy, and what happens to inflation expectations.

On the first, the jury is still out. Oil hit a four-year high of $126 this week before sliding back, and the BoE's scenarios were modelled on prices up to April 22, so even Scenario B may already be optimistic.

The good news is that second-round effects may be modest. The UK labour market has loosened considerably since the 2022 shock, and worker bargaining power and firm pricing power are not what they once were.

But inflation expectations are what worries policymakers most. Double-digit inflation is fresh in the memory, which may make workers quicker to demand pay rises and firms quicker to pass on costs. If the public starts behaving as if 2022 is about to happen again, the bank will have to hike until it hurts.

Whatever happens, more people are expected to lose their jobs.

Unemployment rises in all three scenarios, peaking at around 5.5%. Growth is also weak across the board, though the BoE somehow stops short of forecasting outright recession.

The path for interest rates is where the scenarios diverge most starkly.

In the most severe scenario, the BoE is forced to hike to around 5.25% by Q1 2027, taking us back to the peak during the post-Covid inflation spike.

“The scenarios illustrated that a more pronounced overshoot of inflation was likely to warrant a forceful tightening in monetary policy.” — Minutes of the Monetary Policy Committee​

As ever, the full Monetary Policy Report is well worth a read, if only to appreciate the depth of academic research that goes into the central bank’s modelling. They have tried to learn the lessons of the past to guide us through the latest energy shock.

What do they say about necessity being the mother of invention ?! I thought the following was interesting....

https://tinyurl.com/52dcpjjz

By Curtis Williams

HOUSTON, May 1 (Reuters) - Exports of liquefied natural gas from Canada’s LNG Canada plant topped 1 million metric tons in April, setting a monthly record, according to LSEG data.

• LNG Canada is the country’s first major LNG export facility and the first on North America’s West Coast, giving it direct access to Asia, the world’s largest LNG market.
• All volumes produced by the plant went to Asia in April, with more than half sold to South Korea. One cargo was delivered directly to China.
• China has not been importing LNG from the U.S. since Washington imposed sanctions during the Trump administration, instead opting to resell U.S.-sourced LNG to other countries to capitalize on higher spot-market prices compared with lower long-term contract prices agreed upon with U.S. producers.
• On April 24, the tanker Qingcheng discharged its cargo at the Dongjiakou terminal after a roughly three-week voyage from Canada to China.
• LNG Canada said bringing any LNG facility into operations is a managed and sequenced process and its owners have so far shipped 79 LNG cargoes.
• LNG Canada is a joint venture between Shell SHEL.L, Malaysia’s Petronas PETGL.UL, PetroChina, Japan’s Mitsubishi Corp and South Korea’s KOGAS.
• The plant has had a slow startup since beginning LNG production in June and is not yet operating at full capacity. It can export up to 14 million metric tons per year, equivalent to around 1.16 million tons per month.

1 million metric tons is a drop in the ocean given the output of other producing countries but 14 million metric tons would reduce the burden on Qatar, given it is the wrong side of the Strait of Hormuz. 

https://tinyurl.com/y6dmfyh5

The following article is interesting in terms of the alternatives to the Strait of Hormuz available but also quite shocking in terms of the attacks by Iran on neighbouring countries' assets.

https://tinyurl.com/y6n24ssp

SSB 

SNWS interims due on Wed 6th